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Sunday, November 1, 2009

A Presidential Clunker?

Edmunds car guides have been around since 1966. In 2006 they ceased paper publication and went all online as edmunds.com. They have become a "must use" site for anyone buying a new or used car. So when they came out with a report that the governments Cash for Clunkers (CARS) program cost the taxpayers $24,000 per vehicle, it raised a few eyebrows, including some within the White House.

At issue is this; How many cars would have been sold without the subsidy? The president's Council of Economic Advisers says 700,000 based on total sales. Edmunds estimated it to be 125,000 using standard and widely accepted methodology as Francis Cianfrocca reports in New Ledger:

The analysis was based on an examination of parallel sales trends of vehicles (like luxury cars) that were NOT eligible for a CARS subsidy. These trends showed a steady improvement in overall vehicle sales over the subsidy period. Edmunds assumed the historical sales ratios between luxury cars and non-luxury models, and they compared them to the actual sales increase observed for the CARS-eligible categories. That gave them an above-trend increase of about 125,000 units.

What would have happened had we done something different is a problem economists face all the time. Digging through historical data and finding trends is a daily occurrence. The interesting point here is that the auto industry seems to be improving without government help. We'll know more over the next few months; if sales plummet below historical trends, then the subsidy helped; if trends continue, then no subsidy was necessary.

This is why economics is such a good way to find out what is really going on. The party in power always has an interest in showing that they are doing the right thing. It is the duty of the opposition to present alternatives. Through it all, the unheralded economist searches for the truth. To the extent the economists remain apolitical, they can be trusted.